Reading "Between The Lines" In Annual Proxy StatementsWritten by Paul R. Dorf, Ph. D., APD
Upper Saddle River, N.J. - May 11, 2005 - Now that a large number of proxy statements for public companies with fiscal years ending December 31, 2004 have been issued, those of us that scrutinize them for a living, as well as those that have invested in those companies, have an opportunity to analyze their executive pay packages in detail. With all of attention on Corporate Governance and how to improve level of transparency and insure that a strong relationship exists between pay and performance, these statements provide for interesting reading.
Many comb through these filings with intent of learning if compensation is reflective of recent trends towards “pay-for-performance”. In reality, does compensation accurately reflect company’s financial performance? And does it make sense? We also are interested in learning how companies are reacting to recent and anticipated changes in tax, accounting rules, and related legislation and extent to which those changes are affecting executive compensation design.
With this in mind, we have been reading various recent filings, which when analyzed, still leaves some doubt if companies are being as open and straight forward as we have all hoped for. Unfortunately, there is still a tendency for companies to use ambiguous, unclear language. In some instances, linkage to performance is still questionable. The key is to read what has been presented in a very careful way, taking into consideration what is said, and in some instances, what is not said. Some examples from a recent proxy issued by a large company provide evidence of why it is important to read and interpret them very carefully:
“Our policy is to maximize tax deductibility of compensation payments to (Top Management) under Section 162(m) of Internal Revenue Code and regulations thereunder (Section 162(m)). Our shareholders have approved our incentive plans designed and administered to qualify compensation awarded thereunder as “performance-based”. We may, however, authorize payments to (Top Management) that may not be fully deductible if we believe such payments are in our shareholders’ interests.”
This means that programs are in compliance with Internal Revenue Code §162(m); however, and it is a big HOWEVER, they may not qualify for exemption under one million dollar cap, and therefore would not be deductible for tax purposes. We find it quite a stretch to see how that is in shareholder’s interest, since a non-deductible expense reduces company’s profitability.
Compensation Committee 101: What Does It Do?Written by Paul R. Dorf, Ph. D., APD
Upper Saddle River, N.J. – June 8, 2005 - The increased focus on size of Executive Compensation Packages and their apparent disconnect with realities of company performance have placed tremendous concern on a company’s decision making process. Add to that issues of corporate governance, and you now have placed Compensation Committee very much in limelight. But what is role of Compensation Committee?
The Compensation Committee is appointed by and serves in an advisory role to a company’s Board of Directors. It makes important final decisions on many executive compensation matters, including types and particulars of pay plans themselves, amount of compensation, and even performance measures and specific targets upon which executives will be judged for purposes of calculating incentive awards. In its capacity, Committee is responsible for functioning both in a strategic role, as well as serving in an administrative capacity. Strategically, Committee must consider how achievement of overall corporate goals and objectives can best be supported through use of specific compensation programs that will support a pay-for-performance environment. From an administrative standpoint, Compensation Committee must undertake necessary studies, evaluate alternatives plans, recommend elements of Executive Compensation Package including, salary programs, short-term and long-term incentives, and supplemental benefits and perquisites for Corporate Officers. Ultimately, Committee ensures that these programs are installed and administered in such a way as to achieve desired results.
The following are primary duties and responsibilities typically assigned to Compensation Committee by Board:
·Develop Compensation Philosophy for Company and ensure that it is consistent with company’s business strategy, mission, and culture.
·Approve any compensation plans in which Officers and Directors are eligible to participate, subject to review of full Board and shareholders, as appropriate.
·Responsible for recommending, providing oversight, and approving awards of stock options and other equity, perquisites and other benefits, and employment and change of control contracts, subject to Board and shareholder approval, as required.